Blackstone's Nido Spitalfields is the latest student hall development

• Student housing is seen as a recession-proof investment
• Weekly rents range from £55 in Liverpool to £103 in London

Halls of residence at Nottingham Trent University, private sector firms are moving in to capitalise on the surge in demand for student accommodation. Photograph David Sillitoe for the Guardian
David Sillitoe/Guardian

Towering above Liverpool Street station in London is a striking, newly built skyscraper, clad in blue and 33 storeys high.

But the building, named Nido Spitalfields, is not one of the many new office blocks springing up in the City. Instead, it is the latest development to capitalise on the increasing demand for student accommodation in London. With a gym on its top floor, it will house 1,200 undergraduates from next term. Nido is Spanish for nest.

The company behind the scheme, the American private equity firm Blackstone, has completed two similarly hued towers on the Pentonville Road, near King's Cross, and is planning a third development in Notting Hill.

Student halls of residence have come a long way since the days of the TV series The Young Ones. Swanky, privately run apartment blocks bearing a close resemblance to four-star hotels are springing up all over the country. With several universities in talks to form partnerships with Unite, the largest private provider of student housing in Britain, university campuses could soon be transformed.

In the past two decades, a new industry that provides student pads has grown up as undergraduate numbers have doubled. Unite, founded in 1991, is competing for a slice of the lucrative market with University Partnerships Programme, set up by Barclays Capital in 1999, as well as with Blackstone and the property group Quintain Estates. Such residences are almost fully let and rents are rising fast, especially in London.

For a long time, living in tiny rooms with shared dingy showers and grimy kitchens was seen as a rite of passage for freshers. But now privately managed blocks offer en-suite rooms with double beds, flatscreen TVs and free wireless broadband, as well as CCTV coverage around the building to appeal to security-conscious parents. Students get an electronic key, just as in a hotel.

Comfort and security come at a price, though. Those heading to university this autumn face record high rents, according to research by the website Accommodation for Students. In London, the average weekly rent has soared to £102.80. Kingston in Surrey comes a close second at £101.68, while those studying in Guildford, Uxbridge, Cambridge, Exeter, Middlesex, St Andrews, Egham and Brighton have to fork out more than £80 a week. Nationwide, the average weekly student rent now tops £65 – up 4.3% from last year, which is more than double the increase seen over the previous two years.

The website's founder, Simon Thomson, says that, with landlords having to pay higher fees and interest rates for buy-to-let mortgages, and providers of privately run residences charging higher prices, rents for all student digs are being pushed up.

Harry Moss, who is studying natural sciences at Cambridge and rented a room in a college-owned building last year, says: "While the facilities are great, it seems to have become more and more expensive. I'm a rower for the university, so I [had to stay outside term time and] was renting for nearly 40 weeks last year. At a cost of over £90 a week, it's hard to manage on a student budget."

Students in the north fare better, with rents still below the national average in Liverpool (£55.49), Manchester (£60.12), Birmingham (£57.30) and Sheffield (£60.14).

Unite charges weekly rents of £80 to £100, including bills, outside London – up to £4,300 a year – and double that in the capital. The company's development director, Richard Simpson, admits that its residences – featuring a mixture of studios and shared apartments – cater mainly for well-heeled students, many of whom come from abroad: "If it's just about having a roof over your head and staying within a budget, then purpose-built accommodation is unlikely to meet these needs."

Over the past 20 years student numbers have more than doubled to 1.5 million – but universities provide only 323,000 rooms, of which more than a third are in poor condition, while private sector companies supply 124,000. In 1990 universities housed 44% of their students, compared with 21.5% today. David Gavaghan, who runs Quintain's student accommodation fund, estimates that there is a shortage of about 300,000 beds in the UK.

"There is a significant percentage of existing stock that over time will need replenishing and ultimately rebuilding," he says. "For universities, providing space for students to study and access the internet is increasingly costly."

Private sector companies are stepping in to plug the gap. However, this could mean that even halls on campus become unaffordable for many students – one reason that might explain a rise in the number living at home.

Unite, which operates about 40,000 rooms in 23 cities across the UK, is now talking to universities about joining forces to run student accommodation on campus. Looming cuts to university funding will act as a catalyst to forge such partnerships, Simpson believes.

Mark Allan, Unite's chief executive, says that Britain's universities are considering selling or outsourcing about 20,000 rooms. "We're looking at 8,000 of them. This will be the single biggest change in the sector. Universities are much more willing to sell or partner with the private sector for on-campus accommodation."

Unite's main rival in this area is University Partnerships Programme, which builds residences in partnership with universities and operates more than 20,000 rooms on campus.

Steady flow

While the record increases in the student population seen in recent years are likely to tail off as tuition fees are raised again, a steady flow of overseas students will ensure that demand for accommodation stays high. Two-thirds of the students Unite houses in London come from abroad, many from India and China. In the rest of the country, that figure falls to 23%.

Research from Santander bank shows that foreign students spend on average £93 a week on shopping and going out. The weak pound has boosted their spending power – those from the US finishing their degrees this year have an extra 25% to spend compared with 2007. Luis Juste of Santander says: "The UK is renowned for the quality of its higher education and the number of EU and non-EU students has risen by 5% and 9% respectively in the past year."

For the City, student housing is a sound investment – it is more stable than other property assets and largely recession proof. The danger is that private sector involvement will exacerbate the trend towards a two-tier university system, where students from lower-income families cannot afford to go to top universities.

Allan acknowledges that this is a politically sensitive issue: "We're going to see a lot of investor interest but companies will be selective about the universities they are going to partner with."

James Moss, director at Curzon Investment Property, a boutique investment agent, says: "Student property has been the one remaining goldmine of the market these past years. It's a licence to print money because housing in university locations is often in short supply. The added incentive is that developers of such schemes get preferential planning treatment.

"But the reality is that poorer students are priced out, because these developments are created to serve the interests of shareholders – not students and communities. The government should really look to introduce price capping on such schemes to ensure that all students benefit from them."